Lottery companies cash in as China raises bet on punters

By Farah Master

Published January 05, 2014

Reuters

HONG KONG – Every day during his lunch break, Chinese businessman Shen Bin buys three lottery tickets for about 33 cents apiece and then watches to see if his chosen numbers flash across television screens suspended from the ceiling.

"I haven't won yet. Hopefully one day. But for now, it doesn't matter because the money goes to charity," Shen said in the brightly lit store on a busy road in Shenzhen, a booming metropolis just north of Hong Kong.

Half a world away in New York, investors in Chinese online lottery platform 500.com Ltd have found their own winning ticket: the stock has nearly tripled from its $13 initial public offering price in the six weeks since its New York Stock Exchange debut.

500.com, the only Chinese lottery firm so far listed in the United States, is among a handful of listed companies that stand to benefit as China whittles down thousands of private lottery operators to a handful of licensed and regulated firms serving more than 400 million punters, say industry experts.

"Over the next five years it is very clear that the Chinese market will continue to grow very quickly and the government regulatory regime will become more open and transparent," said Zhengming Pan, chief financial officer at 500.com.

Spurred by rising disposable income, a strong appetite for gambling and more sophisticated games, China's lottery market has boomed with customers splurging some $23 billion in 2012, compared to $37 billion by punters in the world's biggest lottery market in the United States.

With 20 percent growth rates projected for the next three years, China is expected to overtake the United States and leap into the top spot by 2015. The U.S. lottery market is expected to show single digit growth during the same period.

Sales revenue generated by the lottery industry in the United States was $71 billion in 2012 compared with $43 billion in China, according to data from China's Ministry of Finance and the U.S.-based North American Association of State and Provincial Lotteries.

With just 7-8 percent of Chinese adults buying lottery tickets compared to 70-80 percent of adults in the wider Asia Pacific region, the government is keen to lure more punters with improved payouts, new products and wider distribution channels, industry executives say.

"The Chinese government wants to consolidate the current lottery market, making it easier to control and regulate," said Hoffman Ma, deputy chairman of Success Universe Group Ltd, a leisure and gaming company authorized to provide sports lottery sales agency services in three provinces.

"They are seeking operators with stable platforms and want to ensure that all bets that come through will pay tax."

Unlike the United States and Europe, where prizes can climb into the hundreds of millions of dollars, China caps jackpots at 10 million yuan ($1.65 million). Tickets sell for 2 yuan to 200 yuan, with proceeds supporting sports and welfare charities.

NEW RULES

Lottery products are typically sold through authorized stations throughout the country in the form of physical tickets. These range from dedicated lottery stores to counters in supermarkets, post offices and gas stations.

Beijing is expected to announce new rules in 2014 that will clarify and detail legislation in the fast growing industry. New license approvals are likely to be issued within the next two years, say industry experts, but specifics remain unclear.

Companies like Okooo.com, the web platform of lottery terminal provider REXlot Holdings Ltd, which have a solid reputation, technological capabilities and government background could win new licenses, said research house Cinda International.

Just a few years ago, China's lottery market consisted largely of traditional paper lotto tickets. Now, single match games, where players bet on the results of basketball or football, video lottery terminals and scratch games, are more common. Internet and telephone became legal lottery channels at the end of 2012, but online tickets still have to be backed by paper stubs until an actual online market is created.

The Chinese government has so far contained casino gambling to Macau, in part because of social concerns. Officials consider the lottery system more sanitized, with fewer negative effects on local citizens, said Chen Haiping, a professor at Beijing Normal University's lottery research centre.

"It is not realistic to completely ban all forms of gambling. If the government opens gambling, they face ethical issues but if they do not, neighboring countries will continue to attract Chinese tourists to gamble and from the government's point of view that is a loss of state income," said Chen.

Hong Kong-listed AGTech Holdings Ltd won government approval to launch its virtual sports games in some provinces and is expected to roll out games like the Grand Prix-based Lucky Racing Gaming and football game Electronic Ball Lottery nationally in 2014.

These games are aimed at middle-to upper-income Chinese rather than lower income workers who account for the bulk of lottery purchasers. AG Tech's share price has surged some 205 percent over the past year.

John Sun, AGTech's chairman and chief executive, expects the industry to become more open in the next five years with new products and channels. He remains concerned, however, that the industry needs a strong gaming commission or regulator to set standards and monitor operators.

"In the gaming industry, integrity is the most critical foundation," he said. "If you don't have good compliance or a good check and balance, the degree of credibility is a big issue."